ROME: The Italian Parliament has given final approval to a package of austerity measures meant to cut the nation's budget deficit by ?70 billion ($93 billion) over three years.
The lower house voted 316 to 284 for the plan, in what politicians called the fastest approval of a budget bill in modern Italian history.
The Prime Minister, Silvio Berlusconi, who won two confidence votes on the measures, had vowed to push the bill through because of worries in financial markets that Italy would become the next euro nation to suffer a sovereign debt crisis like those in Greece, Portugal and Ireland.
The bill was originally supposed to be debated later in the summer.
Italy's high debt and low growth have placed the country in an uncomfortable international spotlight. The rates the country had to pay to borrow rose this week to the highest levels in three years.
The Italian austerity package aims to eliminate the country's budget deficit by 2014. The deficit is now 4.6 per cent of gross domestic product, below the average for the euro zone.
The package includes ?40 billion in spending cuts. It also increases taxes, including those on petrol, and some trading accounts introduces a co-payment for some healthcare services raises the retirement age and cuts some high-level pensions.
The majority of the bill's provisions take effect in 2013 and 2014, after the government's term ends.
Meanwhile, Europe's banking system remains heavily dependent on government support and would be at risk if another economic downturn hit, the European Banking Authority has said in a report that highlights the lingering weakness in a financial system considered integral to a stronger global recovery.
In the latest stress test of 91 European institutions, the authority found a system that would be rocked by a mild recession and a spike in unemployment rates to levels some European nations already have been experiencing. While only eight of the 91 banks failed outright - another 16 barely passed.
The outcome led the banking authority, the International Monetary Fund, and other European officials to call on national regulators in European countries to make sure that banks improve their balance sheets, and soon.
The authority wants capital plans in place within three months. The 91 banks covered by the study represent the bulk of Europe's bank assets. "The risk outlook for European banks in general is a source of concern," said Andrea Enria, the authority chairman. "There is this lingering concern that we have not cleaned our house."
That feeling is likely to continue as analysts noted a tension between the study's generally positive headline findings, the text of the report, and the reality of present-day Europe.
The eight banks that failed, for example, were estimated to only need about $4 billion in additional capital, a relatively modest amount, and about the same as found in a previous stress test, conducted a year ago.
That test was discredited after several Irish banks failed despite passing the grade. However, the body of the latest report was more cautious.
Frequently Asked Questions about this Article…
What is in Italy's austerity package and what is its main goal for investors to know?
Italy's austerity package is designed to cut the country's budget deficit by €70 billion over three years. It includes roughly €40 billion in spending cuts, tax increases (including on petrol), co-payments for some healthcare services, a higher retirement age and cuts to some high-level pensions. The government says the aim is to eliminate the budget deficit by 2014, which is relevant for investors watching sovereign risk and fiscal stability.
How did the Italian Parliament vote on the austerity measures and why was the vote rushed?
The lower house approved the plan 316 to 284 in what politicians called the fastest approval of a budget bill in modern Italian history. Prime Minister Silvio Berlusconi pushed the bill through quickly because rising borrowing costs and market worries raised the risk Italy could be the next euro nation to face a sovereign debt crisis like Greece, Portugal or Ireland.
How have Italy's borrowing costs reacted and why does that matter to everyday investors?
Borrowing rates Italy had to pay rose that week to their highest levels in three years, increasing urgency for the government to act. For everyday investors, higher sovereign borrowing costs can mean greater market volatility, pressure on Italian assets and potential spillovers into European bond and bank markets.
When will most of the austerity measures take effect and what does that mean for market timing?
The majority of the bill's provisions are scheduled to take effect in 2013 and 2014, after the current government’s term ends. That timing means some fiscal improvements are planned for future years, so investors should consider both near-term market reactions and the longer-term impact of slower-moving fiscal changes.
What changes to healthcare and pensions are included in the austerity plan?
The package introduces a co-payment for some healthcare services, raises the retirement age and trims certain high-level pensions. These measures are intended to reduce public spending and are part of the broader effort to cut the deficit.
What did the European Banking Authority (EBA) stress test reveal and why should investors care?
The EBA stress test of 91 European banks found the banking system would be seriously hurt by a mild recession and a spike in unemployment; eight banks failed outright and another 16 barely passed. The results prompted calls from the EBA and the IMF for national regulators to ensure banks improve their balance sheets, which is important for investors because weaker banks can amplify market stress and affect credit availability.
What follow-up action did regulators request after the stress test and how could that affect bank stocks?
The EBA asked for capital plans to be in place within three months and urged national regulators to make banks strengthen their balance sheets. For investors, banks that need to raise capital or cut dividends could face share-price pressure, while those with stronger balance sheets may be viewed more favorably.
How much additional capital did the failing banks need according to the report, and what caveat did the report include?
The eight banks that failed the stress test were estimated to need about $4 billion in additional capital in total, a relatively modest amount. However, the report was cautious—past stress tests had been discredited when some banks failed despite passing earlier exercises—so investors should treat the findings as a prompt to watch bank balance sheets rather than as definitive reassurance.
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